Can Airbus Survive Without Subsidies?

Last week was the week that Europe had hoped to level the playing field in its long-running dispute with America over commercial-transport subsidies. The global market for commercial transports -- airliners -- is dominated by Chicago-based Boeing and its European counterpart, Airbus. It's a huge market, worth about $3 trillion over the next 20 years, but the U.S. Trade Representative has been complaining since early in the decade that the Europeans don't play fair. The World Trade Organization largely sided with the U.S. in a report issued earlier this year that could potentially prove devastating to Airbus. Last week it issued interim findings on a counter-complaint by the Europeans that Airbus executives had hoped would show both sides are at fault in the subsidies war. But Europe did not get the outcome it was seeking.

As I observed in the Washington Post on Thursday, the Sept. 15 ruling amounted to a slap on the hand for Boeing -- it was found to have received improper subsidies over the last several decades worth the equivalent of a few weeks worth of sales for the U.S. aerospace giant. But the earlier ruling against Airbus was more like having its hand cut off, because the trade body called into question the whole business strategy of the European company. It said Airbus had engaged in a 40-year pattern of leveraging prohibited subsidies from four European governments to systematically deprive Boeing of market share. The WTO questioned whether Airbus could have developed any of the airliners it currently markets without the availability of many billions of dollars in improper launch aid, which it described as "unsecured loans granted to Airbus on back-loaded and success-dependent repayment terms, at below-market rates." The findings against Europe also identified a range of less onerous violations, from tax forgiveness to infrastructure subsidies.

The Sept. 15 judgment against the United States found nothing comparable to European launch aid. Instead, it uncovered a patchwork of federal, state and local provisions that cumulatively gave Boeing unfair assistance in the range of $3 bilion to $5 billion. That's only a fraction of the $24 billion in improper aid Europe was alleging, and it certainly did not call into question the legitimacy of Boeing's business strategy. Quite the opposite: there is now a fundamental asymmetry in the standing of the two aerospace rivals before the trade body, comparable to the difference between having committed a misdemeanor and a major felony. If Boeing gives up all its prohibited subsidies it is still in good shape, but if Airbus must do the same thing it is headed for very hard times -- especially given the problems the European company faces in trying to fix its A380 jumbo jet and A400M military transport as it seeks to develop a competitor for Boeing's 787 Dreamliner.

The Europeans are proposing negotiations to resolve differences, but they should have done that before the WTO called into question the legitimacy of their enterprise. The United States has little reason to negotiate since the WTO has assessed most of the fault in the trade dispute to lie on the other side of the Atlantic. There are big stakes in Washington standing its ground, because it is increasingly clear that the slow growth of the U.S. economy is traceable to a yawning trade deficit in manufactured goods. To the extent that deficit is the result of deliberate market distortions implemented by trading partners like China and the European backers of Airbus, America must enforce its rights under trade treaties to avert national economic decline.

In other words, the dispute over commercial-transport subsidies is just one facet in a far broader debate about the future of the global trading system. If countries aren't going to play by the rules set forth in the WTO treaty, then free trade is doomed over the long run. It will be interesting to see whether Airbus can survive in an unforgiving marketplace once deprived of its crutches, but the stakes for America are much bigger than how Boeing and Airbus fare in the future. What we're really talking about here is whether free trade and free enterprise have a future in a global economy where governments are constantly seeking to confer unfair advantages on their exporters.